Millennials the Key to a Stronger Housing Recovery

The U.S. housing recovery should regain its footing, but also faces a number of challenges, concludes The State of the Nation’s Housing report released today by the Joint Center. Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are moderating growth and keeping millennials and other first-time homebuyers out of the market.

The housing recovery is following the path of the broader economy.  As long as the economy remains on the path of slow, but steady improvement, housing should follow suit.

Although the housing industry saw notable increases in construction, home prices, and sales in 2013, household growth has yet to fully recover from the effects of the recession. Young Americans, saddled with higher-than-ever student loan debt and falling incomes, continue to live with their parents.  Indeed, some 2.1 million more adults in their 20s lived with their parents last year, and student loan balances increased by $114 billion.

Still, given the sheer volume of young adults coming of age, the number of households in their 30s should increase by 2.7 million over the coming decade, which should boost demand for new housing. Ultimately, the large millennial generation will make their presence felt in the owner-occupied market, just as they already have in the rental market, where demand is strong, rents are rising, construction is robust, and property values increased by double digits for the fourth consecutive year in 2013.

One key to realizing the millennials’ potential in the housing market is for the economy to grow to the point where their incomes start to rise. Another important factor is how potential GSE reform will affect the cost and availability of mortgage credit for the next generation of homebuyers, which will be the most diverse in the nation’s history. By 2025, minorities will make up 36 percent of all US households and 46 percent of those aged 25–34, thus accounting for nearly half of the typical first-time homebuyer market.

The report, as well as an interactive map released by the Joint Center, also highlights the ongoing affordability challenge facing the country, as cost burdens remain near record levels and over 35 percent of Americans spend more than 30 percent of their income for housing. The situation is particularly grim for renters, where 50 percent are cost burdened and 28 percent are severely cost burdened (meaning they spend over half of their income for housing).

Click map to launch; may take a few seconds to load.

When available, federal rental subsidies make a significant difference in the quality of life for those struggling the most.  Between 2007 and 2011, the number of Americans eligible for assistance rose by 3.3 million, while the number of assisted housing units was essentially unchanged. Sequestration forced further cuts in housing assistance, which have yet to be reversed.

What Drives the Decision to Rent vs.Own?

By Rachel Bogardus Drew
Guest Blogger

What drives someone's decision about whether to own or rent their home?  Economists tend to focus on financial factors such as user costs and return on investment. Sociologists, on the other hand, generally emphasize lifestyle factors, such as family status and mobility. Overlooked in most prior research on housing tenure (i.e. whether to own or rent) are the effect of individual beliefs about the benefits of homeownership on such decisions. Said another way, how do our expectations of outcomes associated with homeownership influence our desire to own?

My new working paper examines whether the stated beliefs of renters (ages 25-64) about the benefits of homeownership can predict their intentions to purchase a home in the future. Such beliefs include both financial outcomes (investment potential, value versus renting) and lifestyle factors (having control over living space, a better place to raise children) that are commonly associated with homeownership. These beliefs are considered alongside other known determinants of tenure preferences, such as age, race, income, and family status. The analysis also controls for some potential constraints on renters’ tenure options that might sway their intentions, such as their ability to qualify for a mortgage and the amount of financial sacrifice they would need to make to buy a home.

The analysis finds that, while most of the demographic and economic conditions considered are still strongly correlated with intentions to buy a home, they are less predictive than stated beliefs in the benefits of homeownership. Indeed, renters who hold strong beliefs in the financial and lifestyle benefits of owning have between 1.7 and 3.8 times higher odds of wanting to buy in the future, regardless of their individual characteristics (see Figure 1). Perceived constraints on tenure options, meanwhile, are generally unassociated with intentions to buy; renters who report requiring a lot of financial sacrifice to own, for example, are only slightly less likely to expect to buy than those who would need to make only some or not very much sacrifice, but no different from those who don’t have to make any sacrifice to own. Ability to qualify for a mortgage was also insignificant to expectations about future home purchases.

Source: Tabulations of Fannie Mae’s National Housing Survey data from 2011 on renters ages 25-64 who expect to move in the future.

Notes: Odds ratios over 1 indicate a greater likelihood of expecting to buy in the future, relative to the excluded group in each category (i.e. white, unmarried, unemployed, 55-64 years old, income under $25,000, debt under $10,000, very positive experience renting, a lot of sacrifice to own, and very difficult to get a mortgage). Bars in grey were not significant (at the 10% level) in the analysis. 

The results of this analysis have important implications for both policy and research on housing tenure. First, they suggest that decisions about homeownership can be biased by beliefs about homeowners, particularly beliefs based on unsupported assumptions about the outcomes realized from the purchase of a home. Policymakers should consider the potential effect of these biases when designing policies that promote and facilitate homeownership, and if necessary take steps to counteract them to improve the efficiency of tenure decisions. Second, these results demonstrate that behavioral factors such as beliefs are significant to individual tenure decisions, and should be included along with other drivers of housing tenure in future studies on this topic. Finally, it should be noted that this analysis is based on survey data collected in 2011, following the recent recession and foreclosure crisis, which may have temporarily skewed views on both the desirability and feasibility of homeownership for some renters. Further research will be needed to assess the enduring effect of beliefs on tenure decisions during the current recovery and potential future housing booms.

Rachel Bogardus Drew is a former research associate at the Joint Center for Housing Studies and recently completed her PhD in Public Policy at the University of Massachusetts.

New Survey Finds Housing Affordability Challenges are Far Too Common

by Chris Herbert
Research Director

Earlier this week, the MacArthur Foundation released its second annual nationwide survey, How Housing Matters. The survey sheds important light on American attitudes and experiences with a range of housing issues. Among the topics covered, one that aligns with a key theme in our forthcoming report, The State of the Nation’s Housing (to be released June 26, 2014), is how widespread the struggle to meet monthly housing costs has become. At last count in 2012, more than a third of all households were paying over 30 percent of their income for housing, the most common standard of affordability. But the MacArthur survey, conducted by Hart Research Associates, finds that an even higher share of respondents (52 percent) report making one or more significant tradeoffs within the last three years because they were struggling to pay their rent or mortgage. (Click figure to enlarge.)

Figure 1

The most common behavior among those struggling to pay for housing is to take on another job or more hours at work, reported by 21 percent.  But for many this is either not enough to close the gap or not an option. So another 16 percent use credit cards to cover their shortfall, which simply pushes the problem to another month. But many also report cutting spending on such important items as retirement savings, health care, and healthy food.  This finding is consistent with our own research; these are precisely the areas where spending reductions are made among those with severe cost burdens (devoting more than half their income to housing costs).

The MacArthur survey is an important complement to existing research documenting the extent of affordability problems across the country, how aware Americans are of the problem, and how supportive they are of efforts to address it. Given how widespread the struggle to pay for housing has become it is not surprising that a majority of households polled for the survey believe that affordable, quality housing (to rent or own) is either somewhat or very challenging to find in their communities.  

Figure 2

Notably, a majority (58 percent) also believe that state and local government should be doing more to address this challenge in both the rental and owner-occupied housing markets.  Hopefully this strong public support will translate into concrete actions to address this urgent problem.

America's Housing Assistance Lottery (Urban Institute)

The JCHS research team is busy these days, putting the finishing touches on the 2014 State of the Nation's Housing report, which will be released via live webcast on Thursday, June 26.  In the meantime, check out this great YouTube illustration, about the scarcity of housing assistance in the U.S., put together by our friend Erika Poethig at The Urban Institute: 

(If the video doesn't appear, watch it on YouTube.)

Pent-Up Demand for Additional Household Formation is Fraught with Uncertainties

by George Masnick
Fellow

In early 2011, economists at the National Association of Home Builders (NAHB) reported that the slowdown in household formation that started in 2007 with the advent of the Great Recession had produced a 2.1 million household formation shortfall by 2010. The authors concluded that the demand for new housing should accelerate dramatically once the economic recovery releases this “pent-up” demand. Another pent-up demand calculation, by Jed Kolko at Trulia, estimated 2.6 million “missing households” in 2010. After three additional years in which the economy has improved on many fronts – albeit at a slow pace – the 2013 Trulia deficit in the household count was still estimated at 2.4 million. But how solid are these estimates and how likely is it that household formation rates will return to pre-recession levels?

One difficulty in making these calculations is that actual household growth estimates since 2007 vary considerably from year to year and are inconsistent among data sets (Figure 1). There is good reason to believe that the most widely used data to track household growth, the Housing Vacancy Survey (HVS, used in the NAHB calculation), has seriously underestimated the number of US households – and as a result household growth – since a revision in methodology in 2003.  The HVS’s average annual estimate of household growth since 2007 of 550-600,000 contrasts with the American Community Survey’s (ACS) estimate of 700-800,000 new households annually and the higher Current Population Survey (CPS) growth numbers of over 1 million new households annually since 2010. Without agreement on actual levels of household growth since 2007, it is quite impossible to gauge the shortfall in growth, and therefore the probable level of pent-up demand. 

Notes: 2013 ACS not available.  2010-2013 growth for the ACS a two-year average of 2010-2011 and 2011-2012 data.

The method used to estimate the “normal” level of household growth also matters. The NAHB number was based on a simple difference between “actual” household growth estimates for the 2007-2010 period, and a straight line trending of HVS household growth prior to 2007. Over the very short run this approach may be appropriate, but would not be expected to hold up over a longer period.

Kolko’s calculations are more sophisticated. Using CPS data, he computes the change in age-specific headship rates (the share of persons in an age group that head an independent household) from the average 2000-07 pre-recession levels. This change, when multiplied by the official annual population estimates for each year, gives the deficit in number of household formations in each age group due to changes in the propensity to form households. This method corrects for the effects on household formation of simple changes in the size and age structure of the adult population, which the NAHB method does not take into account. But what Kolko’s calculation does not control for is the increasing share of minorities in the population. And since Hispanics and Asians have lower headship rates than non-Hispanic whites this oversight is not trivial (Figure 2). In fact, a certain amount of the decline in household formation is due to the changing race/Hispanic origin composition of the population and not to the recent economic downturn.

This issue is exacerbated by an undercounting of growth in Hispanics and Asians over the past decade, as revealed by the results of the 2010 Census. The underestimating of Hispanic and Asian shares of the population in the CPS during the 2000s also means that pre-2010 CPS headship values are biased upward by overcounting the white share, due to incorrect population weights in the CPS survey, making the 2000-2007 benchmark headship rates too high, and exaggerating the decline in age-specific headship pre-versus-post recession.  

Even controlling for both age and race/Hispanic origin in the different surveys, we know that household formations have slowed relative to pre-recession levels, we just do not know by how much given concerns just discussed. We also know that the slowdown is likely a consequence of the recession. But, we are uncertain about whether the reduced level of household formation has been primarily driven by economic factors, or whether it is the result of more fundamental changes in attitudes and behavior regarding independent living by today’s young adults that might be partly recession-driven, but may also have deeper roots.

Lower rates of labor force participation, lower incomes of those in the labor force, rising rents, greater student loan debt and tight mortgage lending conditions are economic factors that could partly explain low levels of independent household formation. But we do not know whether these effects are likely to be short-term or long-term as an improving economy and governmental initiatives could reverse many of these factors quite quickly. 

But trends in college and graduate school enrollment, the structure of the labor force, the timing of marriage and childbearing, and attitudes about co-residence might lead millennials to form independent households according to a different timetable than the generations that preceded them, regardless of economic conditions. Going back to school for retraining is becoming increasingly necessary for technology oriented jobs in a rapidly changing economy. Employment in start-ups, freelance work, and spells of temporarily working long hours in different jobs and on various projects, followed by periods of downtime, are increasingly common. The timing and sequence of important life-course decisions such as co-habitation, marriage, and childbearing have become more fluid. Intergenerational interdependency at various life-course stages has also changed, with parents playing a larger role in financially supporting their children as young adults, in helping to raise grandchildren, and in opening their homes for spells of co-residence when their children ask. These factors may have inertia that will make them less responsive to economic changes.  

Source: Joint Center tabulations of CPS data.  Average of 2011, 2012 and 2013 values.

And even if market forces are the primary reasons for depressed rates of household formation, geographic variations in job and income growth and housing costs and availability mean that the magnitude and pace with which pent-up household formation is released should vary in different parts of the country. For all these reasons calculations about the extent of pent-up demand for housing and speculation about its causes, when demand will be released, and what kind of housing will be required to meet future demand are fraught with uncertainties. The latest Joint Center household projections hold household formation rates constant at average 2011-2013 levels, making no allowance for the future release of pent-up demand, and should therefore be considered conservative.